Educate Yourself

Week in Review
For the week 5/1/2006 - 5/5/2006
Brian Trumbore
President/Editor, StocksandNews.com

An editorial in the Washington Post offered that when it comes to Iran and its suspected nuclear weapons program the time for action is now, "ideally within the Security Council, but if necessary outside it."

But when you look at the parties that are setting policy, permanent Security Council members Russia, China, the U.S., Britain and France, plus Germany, hopes for a consensus are bleak. The United States is now sniping at Russia (more on this later), both Russia and China don't want to rile up Iran, let alone the fact they are supplying it with arms, the U.S. has lost a ton of credibility with its missteps in Iraq, Britain's leadership is in a total state of disarray, France's government is enveloped in a crippling scandal involving a rival for the presidency, and Germany's new chancellor is weak.

The only nation Iran has to fear these days would appear to be Israel, and at least for now Israel can ill-afford to act alone.

Once again, we are fed lines like the following that appeared in a front page story in Sunday's New York Times. In terms of Iran and the bomb, "intelligence estimates say that day is still 5 to 10 years away, assuming there is no clandestine effort that no one has detected."

Call me na?ve, but just who are we dealing with? A regime that lied for 18 years to the International Atomic Energy Agency, that's who. At this point, for any journalist, intelligence official or head of state to act as if anything Iran says is truthful is patently absurd. What we lack is the intelligence to know just where and at what level Iran's nuclear activities are taking place.

The EU-3 - Britain, France and Germany - have advocated a go slow approach and a resolution is being advanced that calls for cessation of Iran's uranium enrichment activities while offering no fixed deadline or specific threats.

As for the Russian and Chinese positions, just know that Moscow sold a battery of sophisticated air defense systems to Iran as the Kremlin prepares to host a G-8 summit. This is nuts.

Is it 1938 all over again as some Israeli officials claim? Yes. Can Iran be stopped before we wake up one morning to find world financial markets in freefall because Tehran tested its first nuclear weapon? Doubtful.

And when it comes to U.S. leadership these days, which has been reduced to the White House pleading with the world that "Iran is not Iraq" and that the administration desires a diplomatic solution, William Kristol of The Weekly Standard offered:

"(It's) true the Europeans don't fear the Bush administration any more. Nor, unfortunately, do others. One might also note that, despite all the goodwill built up by our outreach to the capitals of Europe, President Bush seems much weaker today than he was in the bad old days of unilateralism and bellicosity, and so does the United States. But the State Department is popular, and at least we don't look like Neanderthals in the drawing rooms of Europe and Georgetown.

"Condi (Rice) and her colleagues may come home and say, privately, it ain't so. But it is so. Much of the U.S. government no longer believes in, and is no longer acting to enforce, the Bush Doctrine. 'The United States of America understands and believes that Iran is not Iraq.' That's a diplomatic way of saying that the United States of America is in retreat."

Without a doubt, in the opinion of your scribe the big news on the week was the pronouncement of long-time bear, Morgan Stanley chief economist Stephen Roach, that he is "feeling better about the prognosis for the world economy for the first time in ages," citing orderly global currency adjustments and an Asia that is increasingly less reliant on exports as consumers begin to open up their pocketbooks.

I'm not saying Mr. Roach is right, especially since he then fails to make a point I've been offering up the past few months. These same Asian consumers, as well as their emerging market brethren on other continents, are also beginning to pile up debt; many having discovered those little rectangular cards made out of plastic for the first time.

"Why this is so easy!" "Yeah, isn't it?" Now just wait for your bills to start rolling in.

But to give Roach his due, the economy is indeed cooking. This week readings on personal income and consumption were both up big, the wage growth component of the April employment report was at its highest level in five years, various indicators on manufacturing activity were solid, first quarter earnings continue to be generally well received, chain store retail sales, led by Wal- Mart, rebounded from March's desultory pace, and even energy prices cooperated this week and fell across the board.

Globally, Euro-zone manufacturing was at its highest pace in five years and the Bank of Japan had a rosy forecast for that nation.

Fundamentally, there is little not to like. But you don't expect me to end here, do you?

If we're doing so well, why did a recent NBC News / Wall Street Journal poll show that only 19% are confident about the state of the economy vs. 77% who aren't? It's not necessarily about high gasoline prices, but even bigger issues such as ever rising health care, job insecurity, the safety of one's pension, rising interest rates and the impact on adjustable rate mortgages, as well as a general feeling that it is far tougher just to 'keep up' than in the past.

This last point, more theoretical than quantitative I'll admit, is perhaps best exemplified by our continuing need to tap our home equity; record levels in the first quarter despite the rising rates. Some of it is used to pay down debts, much of it to fill this almost psychotic need of ours to have the best of everything, whether or not we can actually afford it.

But to finish on a more positive note, the federal budget deficit is declining at a rapid rate and the Congressional Budget Office now pegs it at as low as $300 billion in 2006 vs. $318 billion in fiscal '05. The Bush tax policies deserve a lion's share of the credit here, but it also helps spotlight the fact that the deficit could have been far lower still had the president showed some guts on the spending side of the ledger. At the same time there is no rosy outlook as the demands on Medicare, Medicaid and Social Security begin to explode in the coming years.

In the meantime enjoy the ride, if that's your predilection. At week's end the Street soared on hopes the Federal Reserve is finally done raising rates after a last hike this coming Wednesday. I myself will stick with my large cash position, earning about 4% these days, and a little carbon fiber as the world turns to increasing use of alternative energy sources like wind power.

You see, there are some major geopolitical storm clouds gathering on the horizon, some currently well below the radar. We really don't like each other, sports fans, and in many cases we absolutely despise our neighbors. The consequences are likely to be both many and tragic.

--The Dow Jones Industrial Average finished the week at 11577, just 145 points shy of its all-time record level of 11722 set on Jan. 14, 2000. For the week the Dow was up 1.9%, with the S&P 500 adding 1.2% to 1325 and Nasdaq tacking on 0.9% to 2342. For the S&P it was a significant technical breakthrough on Friday. On the year, as you see down below, we could finish up right where we are at year end and be fully satisfied with the performance. My own forecast for negative returns doesn't look too good these days, does it? But I shall return?even if you don't want me to. [He wrote?half tongue in cheek.]

Regarding equity returns around the globe, by the way, the Dow Jones World Index, ex-U.S., is up 16% this year.

The Federal Reserve meets on Tuesday and Wednesday of this week and will raise the funds rate another 25 basis points to 5 percent. As always the issue is the language in the accompanying statement. I suspect it will provide little clue as to the future course of action as the Fed says it will monitor all upcoming data just like the rest of us. If the pace of growth stays hot and inflation continues to creep up, then rates are rising higher still as those with adjustable mortgages increasingly commit hari-kari in response.

Australia raised its own rates for the first time in 14 months last week and the European Central Bank is close to doing the same again. As for the Bank of Japan, most are now estimating it will finally initiate its own tightening regime between June and August.

None of this is good for the U.S. dollar as the world continues to diversify away from the greenback and while a falling dollar is beneficial to some American exporters, it's not necessarily great for all of them as the cost of goods sold may end up rising faster than the final price in foreign markets.

--Little Evo Morales, newly elected president of Bolivia, sits on a pile of natural gas that supplies half of Brazil's needs. But Evo, who is morphing into Venezuelan President Hugo Chavez's Mini-Me, has decided to nationalize his natural gas industry and retake control of 1990s privatizations. This most impacts Brazil's Petrobras and Spain's Repsol and the leaders of both nations were livid. The budding dictator is seeking an increase on royalties from 50 to 82 percent and at that extortion rate much-needed investment would hardly be forthcoming.

But at week's end, leaders of Argentina, Brazil and Bolivia agreed to open talks on revising old contracts and we'll see just how bold Evo proves to be. If you glance at a map and look at the shape of Brazil, it almost looks like a blob?.about to swallow Bolivia. Not that this is happening anytime soon, mind you, but you won't hear any outcry from me if it were to occur.

Back to the here and now, gasoline futures in the U.S. took a breather on slower demand (we really do cut back a bit when the price hits $3.00 at the pump), as well as rising inventories as refineries ramp up production following spring maintenance projects.

Lastly, I loved the reminder from the Wall Street Journal concerning then President Clinton's rejection of drilling in the Arctic National Wildlife Refuge back in 1995, arguing that it would take 5 to 10 years for any production to come on line. So we would have had use of ANWR's extensive reserves by now, right?

--The real estate bubble continues in much of the world. New Zealand keeps registering record home prices while in South Korea I saw that prices for condos and townhouses are up 16% year over year. But domestically, both home builders Toll Brothers and Hovnanian talked of growing inventory gluts.

--U.S. auto sales were abysmal yet again in April for General Motors, down 11%, and Ford, off 6.6%; while Toyota's rose 4.5% and Honda's were up 2.6%.

But interestingly, while we keep playing up the Japan-U.S. sales differential here, in Japan itself car sales for its own Big Four (Toyota, Nissan, Honda, and Mitsubishi) were off 7-27% in April; the 10th straight month of declines there due to "lack of new models." [South China Morning Post]

[Back in the U.S., long-haul tractor trailer driver Ken S. tells me he passes six Ford dealerships on a regular basis in Nebraska, Iowa and South Dakota and they are all loaded with inventory, even on the grass as they say, especially pickups.]

--The Financial Times had a story on the hedge fund industry and how institutions, not just wealthy private investors, are piling in. But the institutions, with their different mindset, have been changing the rules of the game, telling managers that while 20% gains would be nice, 10% is fine. A down year, though, is forbidden.

So the hedge fund managers weigh this mandate and say, hey, I just want to make sure I at least take in the 2% fee each year so I'll give them the 10% they want. Thus, many of the larger operations are actually taking on far less risk than before when they were mostly beholden to individuals who were looking for lights-out performance.

--Following up on my comment last week concerning a new liquid crystal display / flat panel plant opening in South Korea, on Monday I saw these headlines in a local paper.

"Sony to announce robust turnaround?due to brisk sales of flat- screen televisions"

--I picked up the following on my trip, an op-ed from Professor Lim Hua Sing of Waseda University in Japan. Just thought you'd like to see how the U.S. is viewed in certain circles.

"Washington should listen to Japanese consumers. It should invite Japanese consumer groups to U.S. cattle ranches to discuss the problems, and with U.S. officials?.

"The United States is the world's largest producer of beef. It raises about 100 million head of cattle of which about 35 million are processed annually for human consumption. In 2003, Japan was the top importer of U.S. beef at 37 percent (417,000 tons) of total U.S. exports, followed by Mexico and South Korea both at 23 percent (267,000 tons) and Canada at 9 percent (103,000 tons).

"On Dec. 23, 2003, a Holstein cow in the United States tested positive for?mad cow disease.

"Before the ban on U.S. beef imports, Yoshinoya D&C Co. and four other restaurant operators were serving more than 1 million bowls of rice topped with beef each day. U.S. beef was the key ingredient. With a moderate amount of fat, U.S. beef seems to suit the Japanese palate?.

"Japan took very strict measures to ensure that beef available to Japanese consumers is safe. When a calf is born in Japan, its date of birth, breed, the address and name of the producer and the identification number of its mother are registered with the government. A tag with a number of its mother are registered with the government. A tag with a number assigned to each calf is affixed on its ear?.

"Since October 2001, Japan has blanket-tested all cattle slaughtered for human consumption, as well as those that died of illness or accidents. There are four U.S.-approved facilities within Japan that process beef for export to the United States. U.S. inspectors visit them once a year. A manual for U.S. exports lists a strict set of rules that must be observed by processors. For example, they are required to wash their hands each time after processing an individual animal, check each hour the temperature of refrigerators where beef for export is kept and ensure once a day that thermometers are not broken.

"In the United States, cattle are put out to pasture for a year and then moved to large production farms where they are kept and raised until they are butchered. There is no strict traceability system as in Japan. Compared with Japan's strict safety control measures, I am flabbergasted at the slipshod manner in which the United States failed to remove risky animal parts from a beef shipment to Japan." [Asahi Shimbun]

--In South Korea, foreign investment in the country is at record levels while the economy generates record exports. GDP is anticipated to be at least 5% this year. When you talk of tipping points, here, as in other Asian countries, the stronger currency (in this case the 'won') makes Korean goods more expensive but it hasn't hurt that much; just as in the case of high oil where a local newspaper said the economy here was better equipped to deal with surging oil prices than in the past. Where have you heard that before?

I also observed in my walks around Seoul that there appears to be a Starbucks and Dunkin' Donuts on every other corner.

But, just as I've been discussing in this space recently, there is another worry in Korea. Headline in the Korea Times:

This continues to be a growing issue worldwide. In Korea, the top 10% of households earn $97,600 vs. the bottom 10% at $2,000.

--Despite the fact there have been more human deaths in Indonesia from bird flu than anywhere in the world the past few months, 32 by last count, people here are back to eating a ton of chicken. Day to day, they look at the numbers and view the threat as negligible.

--Singapore, a nation of just 4.4 million, has a fertility rate of 1.24. [2.1 is the breakeven replacement figure] That doesn't bode well for their economic health. And Japan's remains at around 1.3. Here, there is also a severe shortage of doctors.

--A Picasso portrait of his mistress with a cat sold at auction for $95.2 million, while a Van Gogh sold for $40 million and another Picasso scored $34.7 million. All highly overrated works of art.

But what this brings up is a big fact of life for museums these days. Do you take advantage of the bloated market, fueled by hedge fund operators for the most part, to sell some of your own prized possessions in order to fund museum operations and expansion plans?

--Coca-Cola and Pepsi have bowed to pressure and agreed to stop selling sugared sodas in schools. Kids said, "Whatever."

--Despite living just three blocks from Lucent's headquarters, I normally don't drive by unless I'm returning from the airport. [Otherwise, you get hit by 'negative gamma vibes' that just bring you down.] So I noticed upon my return on Thursday that the lawn was in horrible shape. Now granted, we've been short on rain in this area thus far this spring, but if you're trying to make an impression on prospects visiting HQ you'd think this would be money well spent. If you want people to think you're quality, project it!

--Inflation Update: Friend Brad K. passed along that steel prices for his business, in-ground swimming pools, are up 14-50% in just the past few weeks. And Trader George reported that New Jersey Transit instituted a 7% fare hike. On the deflation front, I can report that not all my beer purchases in Seoul were $16; as I noted last time, this having been the cost of a pint in one establishment. So to me, if you start at $16 and then find another joint selling $4 beer, that's deflation.

--Finally, the great Louis Rukeyser passed away. It's a shame he never got a chance to say good-bye appropriately. Some thoughts on his passing.

"Before CNBC, before the Internet, before the over-amped exhortations of Suze Orman and Jim Cramer, the wry Rukeyser was the most important source of financial advice on the air. That is no small mantle; the rise of the mom-and-pop investor class in the latter half of the 20th century was easily one of the most transformative economic movements in American history."
--Paul Farhi / Washington Post

"Fridays at 8:30 find me - amply fed, digestive organs ruminating contentedly to the rhythmic sloshing of martini juice - sitting in my Louis Quinze armchair awaiting another installment of 'Wall Street Week.' By 8:33 my mind is reeling so wildly with gyrations of the Dow Jones average and the pinwheeling of money funds, Treasury bills and gold markets that I often require a calming infusion of brandy."
--Russell Baker, back in the 1980s, as reported by the New York Times

"To be sure, during Rukeyser's 32 on that show, and later on CNBC's 'Louis Rukeyser's Wall Street,' the optimist label wasn't always meant as a compliment. Critics carped that he was 'too bullish,' and even fans recall that Rukeyser was fond of teasing or even dismissing experts on his show who he believed were too negative about the markets.

"In the long term, however, Rukeyser was right, and not only about the stock market as a generator of wealth over time. More significantly, he had faith in the ability of ordinary folks to play the investing game alongside the pros, albeit with a set of wise rules. He was both a proponent and an exemplar of the rise of the middle-class shareholding society - the 'opportunity society,' long before it became a political slogan. Many Americans who followed his show were richer for it, whether they took the stock picks of his guests or merely honed their own instincts?.

"History has already validated Rukeyser's optimism about the American system, and thus about the ultimate course of the stock market. As (money manager and frequent guest) Brian Rogers notes, 'If you think back over the past 30 years, it was a good time to be bullish.' On balance, it always is when you're investing in America, and we will miss having this particular cheerleader for the next 30 years as well."
--Editorial in the Wall Street Journal

Personally, there is little doubt my own interest in Wall Street was stimulated by Uncle Lou. Many a night I would watch his program with my parents on Friday nights (when I wasn't playing poker with the guys), and later at PIMCO Funds I saw firsthand the love Middle America in particular had for Rukeyser when we co-sponsored one of his events in Las Vegas. Fans lined up for hours just to have their picture taken with him (while my co-worker Ralph P., frequent guest Alan Bond and I took in the scene). [Alas?Mr. Bond is now serving time in prison for collecting a few too many classic cars at the expense of clients, but I digress.]

Rukeyser was harshly criticized in later years, particularly as the bull market came to a thudding crash, for dumping then bear Gail Dudak and Chief Elf Robert Nurock. His treatment of them was cruel.

But in looking at his career in full and his huge role in investor literacy, one can only conclude that Louis Rukeyser was a giant.

Iraq: You get to a certain point on an issue such as this and there is so little to say. Prime Minister-designate al-Maliki is in the process of shaping a new government and Sunni cooperation is dependent on their receiving what it believes is a fair share of the oil revenues, even though the other two players, the Kurds and Shia, physically control the resources. Without agreement on this ultimate issue there is no unified country for the U.S. to defend and it will be time to exit.

Israel: Prime Minister Ehud Olmert's Kadima-led coalition has 67 seats in the 120-seat Knesset, though the cost of the Labour party's support was to grant their leader, Amir Peretz, the defense minister slot even though Peretz has zero experience in this realm.

But Olmert also announced his strategy for redefining Israel's borders. Settlers were told to abandon their dream of holding onto all biblical lands while Olmert told the Palestinian Authority he's pushing through his program with or without its agreement.

"The borders of Israel that will be formed in the coming years will be significantly different from the territories that the State of Israel holds today?.I, too, like many others, dreamt and yearned that we could keep all of the land of Israel in our hands and that the day would not come when we would need to give up parts of (it)," said Olmert.

But faced with the demographics and high Palestinian birth rates, it was impossible to hold onto scattered settlements without jeopardizing the Jewish state.

Right-wingers such as Likud's Benjamin Netanyahu countered, "There has never been a government that has given up so much ahead of time and relieves the other side of its obligations."

China: Thinking the Vatican would put up little resistance, Chinese authorities ordained two Catholic bishops despite their not having been approved by Rome. Pope Benedict XVI lashed out through a Vatican spokesman.

"The Holy Father has learned of the news with profound displeasure. It is a grave wound to the unity of the church."

A Vatican expert, Marco Politi, labeled the statement "the strongest protest, not only of this papacy but the strongest protest in the last decade surely."

Benedict vowed to excommunicate the bishops and negotiations on normalizing relations between the communists and the Vatican have been shelved.

I noted awhile back to watch the Pope's new selection for Hong Kong, Cardinal Zen, and Zen has already stepped to the forefront of this issue. Remember how John Paul II helped change the face of the Soviet Union? Remember how Stalin, back in 1935, famously proclaimed, "The Pope! How many divisions has he got?"

Taiwan: Meanwhile, as the Bush administration tries to get some shred of support from China in dealing with Iran and North Korea, the White House totally abandoned Taiwan's President Chen Shui-bian.

Chen is making a trip to Latin America to visit two of the 25 nations that still recognize Taiwan over the mainland, Paraguay and Costa Rica. In the past, Chen has been allowed to stop in the United States for refueling and a speaking engagement or two to a pro-Taiwan group.

But this time the administration humiliated Chen by saying he could only refuel in Alaska. Chen opted out and was flying to Latin America the other way, west, where he was to refuel in Lebanon. But the Chinese ambassador there caught wind of it and Lebanon pulled the request while Chen's plane was in the air. He was then allowed in to Abu Dhabi, and later, secretly, Amsterdam. This is a black mark on the Bush administration, especially in light of the following. [Though I have newfound respect for the Netherlands.]

Russia: So whereas the White House is loath to offend China, this week it blasted the Kremlin in the form of a presentation Vice President Cheney gave in Lithuania.

"In many areas of civil society - from religion and the news media, to advocacy groups and political parties - the government has unfairly and improperly restricted the rights of her people. Other actions by the Russian government have been counterproductive, and could begin to affect relations with other countries."

Cheney also decried the Russian government's growing use of the energy card as "tools of intimidation or blackmail."

Needless to say these remarks came as a shock to President Vladimir Putin, who wasn't directly named by Cheney, so soon before Putin hosts the G-8 summit and while the United States is seeking Russia's support in the Security Council on the issue of Iran.

[Flashback, "Week in Review" 12/31/05: "Russia's true relationship with Iran will also become readily apparent over just the next few months. The U.S. probably won't like what it sees."]

Relations between Moscow and Washington are rapidly approaching Cold War levels at the worst possible time. Putin himself gives his state-of-the-state address on Wednesday. He's likely to fire back.

On a related topic, Cheney headed to Kazakhstan in an effort to push that government to build a new gas pipeline that bypasses Russia on its way to Turkey; an effort to protect European supplies from any further mischief by the Kremlin's Gazprom. This is also part of an effort by the U.S. to fight back against China's exploding influence in the region as it seeks to secure its energy future.

India / Pakistan: After 2 ? years of on-again, off-again talks between these two, little progress has been made on contentious issues such as the fate of Kashmir. Matters were further complicated by an attack on Hindus in the disputed territory that claimed at least 35 lives. And, as feared, Maoist rebels killed 15 in a rural part of India.

Also, an Indian telecom worker in Afghanistan was beheaded by the Taliban, as the Indian government is increasingly concerned Pakistan is supporting the Taliban, once again, in order to limit India's own presence in the country.

Britain: Prime Minister Tony Blair's Labour Party suffered a crushing defeat in local elections and Blair cleaned house on Friday, including the dismissal of foreign secretary Jack Straw, Condi's boyfriend. Blair should have stepped down last year in favor of Gordon Brown, but now Brown himself is severely tarnished goods.

France: According to published reports, in 2004 President Jacques Chirac asked Prime Minister Dominique de Villepin to investigate rival Nicolas Sarkozy for his role in a long-running corruption scandal. De Villepin supposedly used a senior intelligence officer to reach a conclusion both Chirac and de Villepin knew to be the case beforehand; that being any linking of Sarkozy to this particular scandal was bogus.

This incredible abuse of power now threatens not just de Villepin but also shreds Chirac's legacy to nothing as he prepares to exit the scene, though for his part de Villepin has vowed to hang on. It's also obviously a big boost for Sarkozy's presidential aspirations.

Italy: Prime Minister Berlusconi finally conceded the election to Romano Prodi. I mentioned last week, though, that Prodi's elevation may impact the fate of Italy's troops in Iraq but at week's end Prodi has not let on that he would change the timetable already in place for Italy to remain through year end.

Sudan / Darfur: The peace agreement signed between the government of Sudan and the largest rebel faction in Darfur won't last. But it's finally a step in the right direction.

Serbia / Montenegro: After ten years the government here continues to refuse to arrest and handover war crimes suspect General Ratko Mladic so the European Union suspended talks aimed at Serbia's membership. For the Serbs to be this dumb is really quite amazing and obviously speaks volumes about the hard-core element here that refuses to see the light of progress.

Sri Lanka: Last time I observed that civil war here is important if for no other reason than the spreading of terror techniques by the leaders in the field, the Tamil Tiger rebels. By way of backing up my claim, know that this week the rebels set off a remote-controlled bomb concealed in a bicycle that was detonated as a naval foot patrol passed, killing five and strewing body parts all over the place. These guys are terrorist masterminds and passing their knowledge to other groups spells further trouble for the West. [Think dirty bomb in a bicycle.]

South Korea: And finally, last week I literally got off my DMZ tour bus and started wrapping up WIR in order to meet my deadline. Some further thoughts, given the passage of a bit more time for contemplation.

South Korea's youth is hopelessly na?ve, though their optimism on future relations with their cousins to the north is also to be admired to a certain extent.

The youth here conveniently ignore the fact that no one has a handle just what is going on in Kim Jong il's bomb works. What we do know is North Korea is transferring know-how and hardware to the highest bidder; most recently, Iran.

It is true, however, that North Korea has not been linked to a specific terrorist act since the bombing of a KAL flight in 1987, and the United States has actually asked Seoul to shift its focus internally to the threat from al Qaeda owing to the fact Korea has 3,700 troops in Iraq.

It's an intimidating drive from Seoul to the border, with barbed wire and watchtowers all along the Han River. You also pass all manner of tank traps and concrete overpasses that can be exploded to block highways in the case of an invasion.

But after seeing some of the defenses, and having a good idea of what I couldn't see, I don't envision how it's remotely possible to carry out a massive invasion without it getting repelled immediately. Clearly, the North had its chance in the 1970s as it was building the tunnels before they were discovered, and only after a defector came in from the cold and warned Seoul about their existence. Even still, it took six years to find the first one!

So that leaves Kim with but one option if he ever decided to cross the line; an all-out artillery strike with the potential use of nuclear weapons.

Would he do this? More importantly, would his generals carry it out? Are his generals crazier than he is? One suspects at least one or two of them are.

If you face nuclear annihilation in the form of U.S. retaliation, do you still cross the line?

But this isn't like the days of MAD (mutual assured destruction) and the Cold War.

Or does North Korea just move along, develop some areas for capitalism, such as in Kaesong, to bring in hard currency while continuing along its criminal path as best it can, selling weapons and possibly nukes to the likes of Iran?

What is needed is another defector as in '68 who can pinpoint the nuclear facilities. Or does the North send a dupe over, a la what basically happened with our intelligence screw-ups in Iraq?

I admire South Korea for the huge strides it has made as a country, but the worry for the U.S. is that one day the people elect a leader who lets down his guard. It's the same concern I have with the U.S. electorate, of course. And it is just as much an issue in Britain, France and other key spots.

So this is what I think about, having been to the DMZ and looked over into Mordor. The Bush administration, as pointed out above, is fond of saying "Iran is not Iraq." I think you could also say "Iran is not North Korea." But both must be dealt with.

Dow Jones +1.9% [11577]
S&P 500 +1.2% [1325]
S&P MidCap +1.7%
Russell 2000 +2.3%
Nasdaq +0.9% [2342]

Dow Jones +8.0%
S&P 500 +6.2%
S&P MidCap +10.7%
Russell 2000 +16.1%
Nasdaq +6.2%

*Boy, talk about a contrast. Next Saturday, Net connection permitting, I'll be coming to you from a small town in Tennessee after having done some work at Shiloh battlefield. And then no more travel for months.

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. Any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy. The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing. Past performance is no guarantee of future results. The opinions expressed above are not necessarily those of BUYandHOLD, Freedom Investments, its officers, directors or any of its affiliates.

The BUYandHOLD website contains links to third-party websites on the Internet. BUYandHOLD provides these links to these websites only as a convenience to users of the website. Links on the BUYandHOLD website are not endorsements by BUYandHOLD or Freedom Investments, implied or express, of the linked sites or any products, services or links in such sites; and no information in such sites has been endorsed or approved by BUYandHOLD. Linked sites are not under the control of BUYandHOLD or Freedom Investments, and we are not responsible for the contents of any linked site or any link contained in a linked site. No information contained in the BUYandHOLD website or accessed through any linked site, or any link contained in a linked site, constitutes a recommendation by BUYandHOLD or Freedom Investments to buy, sell or hold any security, financial product or instrument. Information accessed through linked sites is not, nor should be construed as, an offer or a solicitation of an offer, to buy or sell securities by BUYandHOLD or Freedom Investments. BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy, and any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.